Lecture Notes - Sourcing Int Equity Capital - Student Version PDF

SOURCING EQUITY FINANCING GLOBALLY TOPIC 6 CHAPTER 14  OUTLINE  - Background  - Sourcing finance/capital globally – “general  - Optimum Cost of Capital Financial/Capital Structure  - Sourcing Equity Financing Globally  -Pathways to listing and global...

SOURCING EQUITY FINANCING GLOBALLY TOPIC 6 CHAPTER 14  OUTLINE  - Background  - Sourcing finance/capital globally – “general  - Optimum Cost of Capital Financial/Capital Structure  - Sourcing Equity Financing Globally  -Pathways to listing and global capital sourcing  -Advantages / Disadvantages for Global Equity Sourcing  - The “How” and “Where” for raising global equity financing  - Alternative Methods for Sourcing Global Equity Financing (the “How”) 1. BACKGROUND  Key instruments used to raise equity capital for a firms operations ;  1. ORDINARY/EQUITY SHARES  DEF - these are units of ownership in a company  - these can be issued privately or publicly  - they are used to raise equity financing ; either IPOs and Seasoned Issues  - the they have a fluctuating value ; depends on the firms fundamentals  - they pay dividends – less strain on the issuing company’s cashflow  2. PREFERENCE SHARES  DEF - a type of security that offers characteristics similar to both common shares and a fixed-income securities – hybrid security.  -normally pay dividends before equity shares  - have different types – what are 4 kinds of preference shares CLASS??? 2. SOURCING FINANCE GLOBALLY  A. Reconsider the Firm’s Objectives  -MNC def  organic int’l growth  need capital to fund the int’l growth  - we will discuss issues regarding domestic and global sources of capital;  Firm objective – lower capital costs & increased capital access; to increase firm’s competitive edge  WACC (cost of cap) and CAPM (firm riskiness) concepts remain relevant in computing the cost of capital and the “required returns” (by investors) 2. SOURCING FINANCE GLOBALLY  Domestic CAPM applies domestic financial parameters, i.e. risk-free rate, market rate, & Beta  ICAPM applies international financial parameters; int’l rates like LIBOR, 1-mtn T-Bill, int’l beta comparisons, etc  While international portfolio theory dictates Domestic portfolio risk (beta) to be higher than International portfolio risk, empirical evidence is inconclusive ; your views on this matter??? SOURCING FINANCE GLOBALLY B. Key Variables affecting Capital Cost and Availability -considerations that a firm has to make when sourcing any capital globally;  (i) Firm-specific characteristics  Financial performance – internal profitability from fin stmts?  Global presence -known around the world?  General Investor perception (securities appeal) – fads for diff securities 2. SOURCING Key Variables affecting CapitalFINANCE Cost and AvailabilityGLOBALLY (cont);  (ii). Structure of Financial Markets  Capital market size (capitalisation)  Depth of secondary markets (liquidity) –facilitates secondary trading ; lower cost of capital  Market segmentation – tastes and prefs of the investors on that market, at the time  (iii). Operational Efficiency of Financial Markets  Operational and governance structures – infrastructure and support on the market  Nature and extent of Regulatory control – cost of compliance; eg quarterly reporting  Perceived political risk & foreign exchange risk – strengthening vs weakening currency in listing mkt? FII/FDI restrictions / capital repatriation, etc THE OPTIMUM COST OF CAPITAL & CAPITAL STRUCTURE 3. SOURCING EQUITY FINANCING GLOBALLY RESEARCH – there is need to understand the dynamics/requirements of the markets on which equity “listings” & “issuances” are intended to take place Access to, and use of global capital markets must not be accidental, but rather a part of a firm’s long term financing strategy There is research to be done, because; (i) – the firm must pitch itself to international investors. -consulting with investment bankers is a start (ii) - also, there are loads of institutional requirements and hurdles to be overcome, in the foreign market - This would also require some restructuring of the firm ; improving the quality and level of its disclosure, and making its accounting and reporting standards aligned to the target market and more transparent to potential foreign investors SOURCING EQUITY FINANCING GLOBALLY - latter two issues would require the company/MNC that wishes to list to do two things; a. Identifying an Investment Banker to advise on the listing process and procedures in the targeted market b. identifying and choosing alternative paths to access global markets. PATHWAYS TO SOURCING GLOBAL EQUITY FINANCING Most firms raise their initial capital in their own domestic market  1. a. Local Domestic Bond Market  b. International Bond Market – see diagram – 2 bond mkts  2 a. Local Equity Market – list and issue  b. Int’l Equity Market - cross list and then issue  3. Initial Offer on Int’l Equity Markets  a. Euroequities –listing and issuing equities on several foreign mkts simultaneously  b. Depository Receipts vs Global Registered Shares 4. PATHWAYS TO LISTING AND CAPITAL SOURCING GLOBALISATION 5. ADVANTAGES/ REASONS FOR GLOBAL EQUITY FINANCING  A firm must choose one or more stock markets on which to cross-list its shares and sell new equity.  The choice of stock market depends mainly on the firm’s specific motives and the willingness of the host stock market to accept the firm.  The following are advantages/motives for cross listing (or listing on foreign mkts):  A. Improve the liquidity of its existing shares and, thus support a liquid secondary market for new equity issues in foreign markets  B. Increase its share price by overcoming mis-pricing in a segmented and illiquid home capital market  C. Increase the firms visibility  D. Create a secondary market for shares that can be used to compensate local management and employees in foreign subsidiaries 6. DISADVANTAGES TO GLOBAL EQUITY FINANCING A. High initial and on-going costs associated with a global listing -frequent disclosure requirements/ thus cost of external auditors/ continuing investor relations programme/etc - These are elaborate, tedious, costly initiatives which involve the commitment and involvement of executive management B. Divulging critical and strategic information about the company - especially when it is still growing and not big enough to absorb cutthroat strategy espionage 7. THE “HOW” AND “WHERE” FOR RAISING EQUITY CAPITAL GLOBALLY  -need to distinguish between two phrases used (interchangeably) to discuss equity capital raising by firms;  - EQUITY ISSUANCE vs EQUITY LISTING  1. EQUITY ISSUANCE  - this is the “how” in terms of raising equity capital for firms globally  - entails issuing instruments that are bought (and sold) publicly or privately by the investors thus bringing money/cash/capital into the firm for carrying out it’s business operations  - it is the ultimate goal of the MNC  - it depicts the “ways” of actually acquiring capital from financiers/investors to finance/fund the projects and business operations of the firm THE “HOW” AND “WHERE” FOR RAISING EQUITY CAPITAL GLOBALLY  2. EQUITY LISTING  -- this is the “where” in terms of raising equity capital for firms globally; where or on which platform do firms raise the capital?  - this involves identifying (or providing) the venue/platform where the capital raising instruments that are used by the MNC to raise capital can be traded by public or private investors  - this basically entails the registration of the MNC’s equity/shares for trading on a stock exchange   entails the venue where the equity raising instruments (e.g. ordinary shares) are registered or listed on a stock exchange by the MNC and traded by the public/investors   doesn’t bring new capital to the firm THE “HOW” AND “WHERE” FOR RAISING EQUITY CAPITAL GLOBALLY  DEPENDENT OR INDEPENDENT PROCESSES (ISSUANCE vs LISTING)  - are the listing and issuance processes independent or dependent  - can you have a listing without an issuance and vice-versa?  A. Equity Listing  - entails;  -the “public/exchange” vetting of the strength and ability of the firm to raise money/capital from the people  - financial statement analysis/history of audited stmts/etc  - enforcing the rules for listing and trading of the capital raising instruments between the MNC and the public, and amongst the public for secondary trading of these instruments THE “HOW” AND “WHERE” FOR RAISING EQUITY CAPITAL GLOBALLY  -enforcing disclosure requirements to ensure proper operational/pricing efficiency, relating to the capital raising instruments   a listing allows the MNC to;  i. gain name recognition  ii. gain market visibility  iii. Etc  - prepares the market for a public issuance** THE “HOW” AND “WHERE” FOR RAISING EQUITY CAPITAL GLOBALLY  B. Equity Issuance  - the “how” of equity capital raising  - an equity issuance can either be “public or private”**  - also, a publicly or privately owned firm can issue/sell ordinary shares to investors  - Private Issuance – where the equity capital raising instruments are offered to a targeted or select group of investors.  - e.g 1.– getting institutional investors and HNWI to invest in the equity of the firm, via buying the capital raising instruments privately.  - getting Pension Funds to contribute money to the building and running of a Mall; Nzano/Station Mall/The Fields Mall THE “HOW” AND “WHERE” FOR RAISING EQUITY  CAPITAL E.g. 2. - where GLOBALLY investors privately buy the capital raising instruments of an ailing firm (MNC), with the intention of turning it around and selling it to the public via a listing once it is profitable  - idea is to take ownership and control of the organisation and turn it around  Public Issuance – this is where the issuance (equity capital raising instruments) is offered to the public (all-and-sundry), on a stk exchange.  - E.g. – an IPO to start Gamecity/ Gallery Gold (Mophane Mine) from scratch (BSE -VCB)  - went for an outright public issuance via listing their capital raising instruments on the BSE  - motive – to share the risk of funding the firms operation among THE “HOW” AND “WHERE” FOR RAISING EQUITY CAPITAL GLOBALLY Therefore – an MNC wishing to raise equity funding via an issuance can choose a “public or private pathway” 8. ALTERNATIVE METHODS TO SOURCE EQUITY FINANCING IN GLOBAL MARKETS  - this basically refers to the different methods of equity issuance, adopted by MNCs to source global equity financing  - these methods can be divided into two categories; “public and private” issuances  A. PUBLIC ISSUES  1. INITIAL PUBLIC OFFER (IPO)  -this is an initial sale of new ordinary shares (equity capital raising instrument) that is made by an MNC via a listing on a foreign stock exchange to raise equity capital for the company  -E.g. Gallery Gold making an IPO to develop the Mophane Gold Mine  - the MNC needs to get the services of a listing team to guide and facilitate the entire capital raising process; inv bankers/security brokers/lawyers/securities “custodians”/etc ALTERNATIVE METHODS TO SOURCE EQUITY FINANCING IN GLOBAL MARKETS  2. SEASONED PUBLIC OFFER  - this is where an MNC that is already listed on a (foreign) stock exchange, issues a “subsequent” tranche of shares to the public to raise capital for the business  - e.g. for expansion – building or financing growth projects and additional branches  - such an exercise also needs a team of advisors like in the initial public offer  3. EUROEQUITY ISSUE  - this is where the MNC initiates an IPO on multiple stock exchanges in different countries at the same time ALTERNATIVE METHODS TO SOURCE EQUITY FINANCING IN GLOBAL MARKETS  3. EUROEQUITY ISSUE (cont)  - e.g. a Bots MNC raising equity capital via an IPO on the JSE, NYSE, LSE, LuSE at the same time  - more expensive for the MNC  MNC needs to have multiple listing advisors who understand the dynamics of each market on which this Euroequity issue will be floated; inv banks/ security brokers/lawyers/securities custodians/etc   also time consuming to comply with the multiple sets of regulations/laws, e.g. listing requirements, for the multiple exchanges and countries on which the issue has been floated ALTERNATIVE METHODS TO SOURCE EQUITY FINANCING  B. PRIVATE ISSUES IN GLOBAL MARKETS  1. DIRECTED PRIVATE ISSUE (PRIVATE PLACEMENT)  -this involves the sale of shares by an MNC to a group of targeted/selected private investors to raise capital for the firm  -it can be done by a private or publicly listed corporation  - private corporation? – shares not listed on any exchange  - still need to procure the services of a team of advisors; value the issue / market the issue / prepare the offering prospectus  less work though, thus less costly  - e.g. building Malls in foreign countries would usually be done via a private placement in that country by the MNC – approaching institutional investors and HNWI, etc to buy “large equity tranches” KEY INSTRUMENTS USED TO RAISE EQUITY CAPITAL FOR FIRMS  1. EQUITY SHARES (recap)  - these are units of residual ownership in a company  - these can be issued privately or publicly  - they are used to raise equity financing, via IPOs and Seasoned Issues  - the value of each share sold must conform to the preferences of the investors in the country in which they are raised – price per share, etc  - they pay dividends – less strain on the issuing company’s cashflow  2. PREFERENCE SHARES (recap)  -hybrid securities defined at the beginning of this topic – CLASS - note the 4 types  and thus MNC will issue best fit for their purposes, and investor preferences KEY INSTRUMENTS USED TO RAISE EQUITY CAPITAL FOR FIRMS  3. DEPOSITORY RECIEPTS (DRs)  - these are basically pass through derivative assets, whose underlying values are the values of the shares of the MNC raising the equity capital  - def – a certificate of ownership in the shares of a company, issued by a bank, representing a claim on the underlying foreign securities  - one certificate can represent multiple shares or a portion of a share, depending on the desired target price per certificate  - started in the USA, where USA banks would parcel the shares offered by international companies wanting to raise equity capital on USA stock exchanges  -voting rights in the AGMs of the underlying issuing company are held by the bank that securitised these shares  E.g. British Telecom Privatisation; SAA??  - Am Dep Receipts (ADR)– these are used to facilitate equity raising for a company incorporated outside the USA wanting to raise money on a USA Exchange  - Global Dep Receipts (GDR)– these are used for a company incorporated anywhere in the world, and wanting to list on any foreign market PROCESS FOR CREATING DEPOSITORY RECIEPTS (ADR)  1. FORM AN SPV – pository of the original shares and DRs  2. PURCHASE THE SHARES OF THE LISTED ENTITY FROM FOREIGN STOCK EXCHANGE – e.g. Brit Telcoms from Lond Stk Exch  3. SECURITISE THE UNDERLYING SHARES – creating P-T-S’s , giving them market pricing appeal  4. LIST SPV ON ANY NATIONAL USA EXCHANGE – E.G. NYSE, NASDAQ  5. TRADE THE P-T-S’s on the foreign exchange DEPOSITORY RECIEPTS MECHANICS – ADR’S KEY INSTRUMENTS USED TO RAISE EQUITY CAPITAL FOR FIRMS  4. GLOBAL REGISTERED SHARES (GRSs)  - applicable mainly to euroequity issues  this is a share of equity in a company that is traded across borders and on multiple exchanges without conversion  - i.e one sh on the home market equals one share on the foreign exchange(s)!  - an identical share is listed on each foreign exchange on which the issuing company is listed  - these shares are traded in the currency of the exchange on which they are listed – (cross rates need to be understood by global investors/investing houses)  - GRSs therefore trade with the sun – 24 hours  - they are “traded” and “deposited” (custody) via electronic systems  - the ultimate holder of the security maintains voting rights (at AGMs/etc)  - DIFFERENTIATE BETWEEN DRs and GRSs - CLASS SUMMARY SUMMARY THANK YOU